Question

Product Costs and Product Profitability Reports, using a Single Plantwide Factory Overhead Rate

Elliott Engines Inc. produces three products—pistons, valves, and cams—for the heavy equipment industry. Elliott Engines has a very simple production process and product line and uses a single plantwide factory overhead rate to allocate overhead to the three products. The factory overhead rate is based on direct labor hours. Information about the three products for 20Y2 is as follows:

	Budgeted Volume (Units)		Direct Labor Hours Per Unit		Price Per Unit		Direct Materials Per Unit
Pistons	12,000		0.30		$46		$22
Valves	18,000		0.15		11		4
Cams	4,000		0.20		61		26

The estimated direct labor rate is $26 per direct labor hour. Beginning and ending inventories are negligible and are, thus, assumed to be zero. The budgeted factory overhead for Elliott Engines is $269,800.

If required, round all per unit answers to the nearest cent.

a. Determine the plantwide factory overhead rate.
$ per dlh

b. Determine the factory overhead and direct labor cost per unit for each product.

	Direct Labor Hours Per Unit	Factory Overhead Cost Per Unit	Direct Labor Cost Per Unit
Pistons	dlh	$	$
Valves	dlh	$	$
Cams	dlh	$	$

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c. Use the information above to construct a budgeted gross profit report by product line for the year ended December 31, 20Y2. Include the gross profit as a percent of sales in the last line of your report, rounded to one decimal place. Enter all amounts as positive numbers, except for a negative gross profit/gross profit percentage of sales.

Elliot Engines Inc.
Product Line Budgeted Gross Profit Reports
For the Year Ended December 31, 20Y2
	Pistons	Valves	Cams
	$	$	$
Product Costs
	$	$	$
Total Product Costs	$	$	$
Gross profit	$	$	$
Gross profit percentage of sales	%	%	%

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d. What does the report in (c) indicate to you?

Valves have the lowest  gross profit as a percent of sales. Valves may require a higher  price or lower  cost to manufacture in order to achieve the same profitability as the other two products.

Answer 1

a. Plantwide factory overhead rate : $ 38 per DLH

Total direct labor hours = 12,000 x 0.30 + 18,000 x 0.15 + 4,000 x 0.20 = 7,100

Plantwide factory overhead rate = Budgeted Factory Overhead / Direct Labor Hours = $ 269,800 / 7,100 = $ 38 per DLH

b.

	Direct Labor Hours per Unit	Factory Overhead Cost per Unit	Direct Labor Cost per Unit
Pistons	0.30	$ 11.40	$ 7.80
Valves	0.15	5.70	3.90
Cams	0.20	7.60	5.20

c. Elliot Engines Inc.

Product Line Budgeted Gross Profit Reports

	Pistons	Valves	Cams
Sales Revenue	$ 552,000	$ 198,000	$ 244,000
Product Costs
Direct Materials	264,000	72,000	104,000
Direct Labor	93,600	70,200	20,800
Factory Overhead	136,800	102,600	30,400
Total Product Costs	494,400	244,800	155,200
Gross Profit	$ 57,600	(46,800)	$ 88,800
Gross Profit % of Sales	10.43 %	- 23.64 %	36.39 %

d. Cams are the most profitable, while valves are the least profitable. Valves have a negative gross profit margin. Either selling price of valves are needed to be increased, or manufacturing costs are needed to be decreased. Allocation of factory overhead under traditional costing and the prudence in using a plantwide overhead rate may need to be looked at.